A Shareholders’ Agreement is a legally binding agreement between the shareholders of a company that outlines their rights, responsibilities, and obligations in relation to each other and the company. It helps to manage expectations, regulate the relationship between shareholders and provide a framework for resolving potential conflicts in the future.

For many business owners, a bespoke Shareholders’ Agreement is one of the most important legal documents they can have in place to protect both their interests and the company’s long-term success. While it’s not a legal requirement to have one, it’s highly advisable for any company with multiple shareholders to establish this agreement early in the business’s life cycle.

Key provisions of a Shareholders’ Agreement

A well-drafted Shareholders’ Agreement typically includes provisions regarding:

  • Share Ownership and Transfer: It governs how shares in the company may be transferred or sold, to ensure that shareholders can maintain control over who is allowed to become an owner of the business.
  • Pre-Emption: The agreement may contain provisions to restrict share transfers unless the relevant shares have first been offered to the company’s existing shareholders, usually under an agreed pricing regime.
  • Decision-Making and Voting: The agreement will typically outline the decision-making process for major company decisions, including who has the right to be appointed as a director, how voting rights are allocated among shareholders and what constitutes a quorum for decisions of the board and the shareholders.
  • Dividend Policy: Shareholders may wish to provide for how the company’s profits will be distributed and specify how and when dividends should be paid.
  • Restrictive Covenants: The agreement may contain prohibitions on outgoing shareholders in relation to soliciting or dealing with existing customers, poaching staff and competing with the company, in order to protect the interests of the business.
  • Death or Incapacity of a Shareholder: Provisions can address what happens if a shareholder passes away or becomes incapacitated, to ensure continuity and stability for the business. The agreement may also include provisions relating to the life insurance policies of shareholders, to ensure that they have adequate funds to purchase the shares of a deceased shareholder as and when necessary.

Why your company may benefit from a Shareholders’ Agreement

  • Confidentiality: Although many of the provisions described above could be included in a company’s Articles of Association, it should be noted that this is a public document which can be easily downloaded from Companies House. A Shareholders’ Agreement, on the other hand, is a private document which keeps the company’s affairs strictly confidential between the shareholders.
  • Prevents Disputes and Misunderstandings: One of the most significant reasons for having a Shareholders’ Agreement is to prevent disputes. Without clear guidelines, conflicts between shareholders can arise over critical matters, such as control of the business or how profits are distributed. Without a formal mechanism to resolve such disputes, the day-to-day operation of the business may be adversely impacted.
  • Protects Minority Shareholders: A Shareholders’ Agreement can offer protection to minority shareholders, ensuring they are not automatically overruled by majority shareholders in important decisions affecting the business or their investment. The agreement could include provisions whereby certain key actions and decisions can only be taken if a certain proportion of the shareholders agree.
  • Clarifies Exit and Succession Planning: Whether a shareholder wishes to sell their shares or leave the company for any reason, the agreement lays out a clear process, reducing the risk of costly disputes or uncertainty over the valuation of shares. This can provide an element of certainty and stability in a time that could otherwise be disruptive to the business.

Conclusion

A Shareholders’ Agreement can be an essential tool for businesses with multiple owners. It can help to manage risks, safeguard relationships, and provide clarity in times of uncertainty. If you’re unsure whether your company needs a Shareholders’ Agreement, please contact BHW’s Corporate and Commercial team for more information on 0116 289 7000 or email info@bhwsolicitors.com.


Published by

Categorised in: ,

Tags: , , , ,